Fiscal Sustainability in the Ghanaian Economy: A Fiscal Reaction Function Approach

Fiscal Policy sustainability has been a major concern in Ghana with an increasing debt situation. This has led to the Government of Ghana seeking a bailout from the International Monetary fund. The objective of this research is to determine the role of budget deficits on the growth of debt. It will also evaluate the current fiscal stance on sustainable economic growth. This is achieved by testing a fiscal reaction function for the Ghanaian Economy based on the Intertemporal Budget Constraint. The estimation was performed using the Ordinary Least Squares (OLS) estimation technique. Stationarity test for the variables was conducted using the Augmented Dickey-Fuller Tests. The results point to a high degree of inertia present in government behaviour when it sets its primary balance. An increase in past primary deficit leads to an increase in current primary deficits. Also increase in debt has a significant and positive influence on primary balance. The study thus recommends that government should cut down on borrowing to finance its deficits.